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How To Buy A Gas Station That Pumps Out Profits - Tips For Buyers

Tips For Buyers Of Gas Stations

Anyone who wants to buy a gas station in California to operate, or even to own absentee, had better get an education about the business first, before beginning to evaluate offerings. The biggest challenge is that there are so many variables in this business that trying to make a choice by comparing gas stations on the market is usually an apples vs. oranges puzzle.

Do you want, and can you afford, to buy the property with the business? How large a business do you feel you can pay for and manage? Should the gas station also have a car wash on the premises? What about a deli, a repair shop, a convenience store? And the prospective buyer will need to decide whether he or she is more comfortable offering a name brand and working with one of the major oil companies, or taking over an independent station and buying from petroleum distributors who are not affiliated with any particular brand.

One way to start understanding some of the issues involved in buying into this industry is by thinking about some of the commonly held beliefs regarding the idea to buy a gas station.

Five of the most popular assumptions about gas station ownership are:

- You can determine a gas station's income by finding out how many gallons are pumped every month and multiplying that figure by the typical 20-cents-per-gallon mark-up added to the per-gallon amount the gas station owner pays to the distributor.

There is no merit to the "twenty cent per gallon" mark-up idea. And no standard way that a gas station owner prices the product. In fact pricing gasoline and diesel products is kind of an art, as well as a science. If your station is in the Mojave Desert 100 miles from the nearest competitor you probably can charge whatever you want and drivers who discover they are low on gas will have to pay your prices. Most stations, however, are in competitive markets and run the risk of losing business by charging too much for fuel, or losing money by not charging enough.

One reason price setting is not always an easy exercise is that it sometimes is smart to lose money on the sale of fuel if that strategy attracts, to the location, gas and diesel customers who may then pay for a car wash service, if there is one at the facility; or they patronize the station's convenience store if it has one - where the percentage of price mark-up can be substantially higher than any profits to be made at the pumps.

Buyer Hint: Focus on which gas stations generate the most profit

- A buyer should avoid a station with a repair garage unless he happens to be an auto mechanic.

Here's the facts: Some mechanics might make a good profit in a station that includes a repair facility, but most owners of a garage-equipped station think it's a better idea to rent out the facility and not have to deal with the problems associated with the vehicle repair business. One mechanic-gas station owner told me "there's more money to be made at the cash register in the office than with a wrench, under a car."

Buyer Hint:  Even if you are a mechanic, calculate whether you might make more money by simply renting out the repair facility so you can concentrate on running the station.

- It's best to purchase a station that is unaffiliated with a large oil company. The independent station owner can buy from any fuel distributor who offers the best price and is not locked in to the costs charged by the oil company franchisor. And the owner of a Shell or Chevron or other oil company franchise is obligated to follow the company's strict rules and to participate in its marketing programs.
 
Fact: For some people, this is good advice. But it means the owner usually will miss a lot of business from holders of an oil company credit card who are in the habit of using it to buy fuel, especially since they receive incentives from those companies to do so. Besides, in the event of a leaky storage tank, the independent owner-operator is on the hook for the cost of dismantling the station, excavating the ground it used to sit on and replacing the fuel storage infrastructure. Then installing a new station. That expense, plus the loss of business for the weeks or months it takes to go through that process has put more than one independent station owner out of business. Franchisees working with oil companies usually can depend on the franchisor to absorb the cost of replacing fuel storage tanks.

Buyer Hint: One question a buyer should ponder is whether he or she would feel comfortable as a franchisee, or would he or she rather be truly independent.

- It makes sense to buy a gas station only if you can purchase the property with it.

In fact, there are hundreds of gas station owners in California who would disagree with that notion. They like the idea of paying rent and letting the property owner be responsible for mortgage and taxes expenses. One owner who carefully analyzed the difference between owning or renting came to the conclusion that the extra cash and mortgage debt that would be necessary to own the land on which her station was situated would generate such a substantial return if invested in other kinds of commercial property that it made more sense, financially, not to have "all her eggs were in one (gas station) basket."

Buyer Hint: Every situation is different. Do the math and determine which approach is most profitable and suitable for you.

- It's easy to determine what a gas station is worth, no matter what other businesses are associated with it, if the buyer simply learns the amount of the owner's discretionary earnings collected over the previous three years and calculates that figure with the industry multiple customarily used to vale that kind of business.

I've seen gas station buyers pay way more for a station than you might think it's worth. And I've seen the opposite, a buyer being unwilling to invest any amount close to what the seller claimed was a fair price based on the so-called industry average multiple. People in the retail petroleum industry and their business brokers have so many different ideas about what is an appropriate industry multiple to use in determining a "fair" price, that it's clear there is no industry multiple.

Buyer Hint: Your final decision will be partly a subjective one, rather than purely the result of ROI calculations. Consider the location of the business, condition of its equipment and terms of the deal.

If a prospective gas station buyer reviews these five assumptions related to making a purchase in this industry he or she may notice that they often are wrong. And yet, there are many exceptions when the buyer might be smart to purchase an independent station, buy the land with it and hire a manager so the buyer can work in the garage as a full time mechanic. The value of understanding these assumptions is to gain insight as to just how complex it can be to decide which gas station to buy. Understanding some of these circumstances, and considering the hints, is helpful in learning how to buy a gas station.

More Information Regarding California Gas Stations On BizBen:

All Gas Stations For Sale - Independent & Branded/Franchises In California

Gas Station Brokers & Agents

Gas Station Articles And Blog Posts - Topics On Buying And Selling

Resources For Buying & Selling California Gas Stations

Peter Siegel, MBAAbout The Author: Peter Siegel, MBA is the Founder (of BizBen.com) consisting of business buyers, owner/sellers, business brokers, agents, intermediaries, and advisors (there are over 90,000 users, and 8,000+ listings (many of those gas stations for sale and wanted to buy postings on BizBen.com). To get signed up for California gas stations for sale and wanted to buy postings (Email Alerts) before they hit the market phone Peter Siegel (BizBen Director & gas station financing advisor and expert) direct at 866-270-6278.


Categories: BizBen Blog Contributor, Buying A Business, How To Buy A Business



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Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.

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Harry Sidhu, CBB, Broker - SF Bay Area, Central Valley, SAC Region

Assisting both sellers and buyers of businesses - dealing mainly with Liquor Stores, Grocery Markets, Gas Stations, Smoke Shops, Restaurant Related, Retail Related, Service Related. Serving SF Bay Area, North Bay, Sacramento area. Call Harry Sidhu, CBB for assistance at 510-366-6130.


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